LONDON (Standard & Poor’s) Oct. 1, 2015–A structural deterioration in China’s growth rate is likely to have a significantly negative effect on non-Asia-Pacific corporate entities with exposure to demand in China, according to a report published by Standard & Poor’s Ratings Services’ titled ”
What China’s Slowdown Means For Corporate Credit Outside Asia.” Using our extensive corporate ratings scoring data to assess which non-Asia-Pacific companies are most exposed to China, the report finds that, for the rated universe outside the commodities sector, exposure is proportionately greater in Western Europe than in North America. In addition, for the small number of Eastern European, Middle Eastern, and African companies meeting this criteria, exposure is particularly high.
“With China consuming some 40%-50% of most raw materials globally, the implications of China’s slowdown are most acute for commodity-related companies. Using our corporate ratings scoring framework, we find that the industries with the greatest exposure to China are semiconductors, consumer durables, technology hardware, autos, and capital goods,” commented Gareth Williams, the author of the study.
The report also concludes that average credit rating trends for China-exposed companies have bettered those with no exposure. This suggests that should the China situation deteriorate further, there is potential for a negative ratings impact on the most exposed corporate sectors.
In the short term, there is clear evidence that the operating environment for China-exposed global companies has become more difficult. Market consensus revenue forecast trends for China-exposed rated corporate entities have been deteriorating since mid-2014, in contrast to stable forecast trends for companies with no exposure. Market consensus capex forecasts for China-exposed
companies had been more resilient, but have now also turned negative. However, our latest economic forecasts suggest that some market concerns for China are exaggerated, and not reflective of the considerable financial firepower available to support China’s economy. We expect China’s growth rate to remain above 6% through to 2017.
“In the longer term, we expect a stronger relative contribution to growth from Chinese consumers benefitting from continuing rapid growth in real disposable incomes. This is likely to provide a favorable backdrop for international companies focused on the Chinese consumer,” said Mr. Williams.
The importance of China for global corporate credit trends cannot be overstated. As the world’s second-largest economy, and one still growing rapidly as it catches up in per capita terms, the country has become pivotallyimportant for the global economy and financial markets.